Monday, 16 November 2015

The push for free trade

By Chong Zi Liang, The Sunday Times, 15 Nov 2015

Free trade pacts have been in the news recently.Twelve countries, including the world's No. 1 economy the United States, struck the biggest trade deal to date last month.The Trans-Pacific Partnership (TPP) will plug Singapore into a market of 800 million consumers in nations accounting for one-third of world trade.In yet another signal underscoring that Singapore is open for business, China - which is not in the TPP - and Singapore launched talks to upgrade their free trade agreement during President Xi Jinping's state visit here last weekend.Also, Singapore and Turkey signed a free trade agreement yesterday that will open up business and investment opportunities for companies from both countries.

But Singapore views such trade deals "not only as economic, but also strategic tools", says Ms Sanchita Basu Das of the ASEAN Studies Centre at the Iseas-Yusof Ishak Institute. The TPP, for instance, "is viewed positively as it is anchoring the US economically in the region" and therefore "of high strategic value to Singapore because of fast-rising China".

Still, the TPP is not yet a reality. The pact has to be endorsed by different branches of government in the 12 countries that signed it.

Leaders of 21 Asia-Pacific economies also meet in the Philippines this week for their annual summit, looking at liberalising trade across the Pacific Ocean.

Why these deals? What is in it for those involved? How has the free trade that these agreements facilitate, changed the way nations deal with each other, especially for a country such as Singapore that is already very much an open economy? Insight takes a look.

FAQs ON FTAsWhy sign free trade pacts?
By Chong Zi Liang, The Sunday Times, 15 Nov 2015With 20 free trade agreements (FTAs) under its belt over the past 22 years, Singapore clearly has been finding such pacts useful long before they hit the headlines recently.But what are the advantages of such agreements?One expert describes the benefits as a case of "using your noodle".Already, in the Asia-Pacific alone, there are about 150 trade agreements, both regional and bilateral, notes Asia-Pacific Economic Cooperation (Apec) secretariat executive director Alan Bollard. Apec, of which Singapore is a member, seeks consensus on promoting free trade in the region.

Mr Bollard adds: "It's a big complicated noodle bowl full of all these agreements."

Where does his organisation fit in that noodle bowl? "I see Apec as a test kitchen for cooking new noodles or new recipes," he says.

Apec complements the FTAs because, as it works without formal, legal set-ups, economies are more willing to try riskier approaches knowing they can exit a position.

It was not long ago that observers thought sweeping global deals were dead in the water.

The World Trade Organisation's Doha Round, named after where the first meetings took place in 2001, aimed to lower tariffs globally. But negotiations broke down in 2008 and have stalled ever since.

Just days before the Trans-Pacific Partnership was agreed on, there was pessimism about whether the 12 countries could resolve seemingly intractable differences on sectors such as pharmaceuticals and agriculture.

But they managed in the end to pull off the biggest free trade deal in history that covers 40 per cent of the world economy.

Being a part of such free trade pacts has a "strong signalling effect" that Singapore is open for business, say observers, including National University of Singapore economics associate professor Davin Chor.

"For example, after the US-Singapore FTA came into force in 2003, this really helped to cement our position as a natural location of choice in the region for US firms looking to set up a presence in this part of Asia," he says.

Such a strategy is a must, given that Singapore is an open economy which bases its growth on global trade. As it already has low import and export barriers, it is to its advantage to commit major trading partners to dropping their own tariffs, say economists and business leaders.

"Even though Singapore already has low tariffs across many goods, FTAs still help the Singapore economy by committing our FTA partners to reduce their tariff rates and other barriers to trade in their international transactions with Singapore," says Prof Chor.

This ensures that Singapore businesses get a similar reception that foreign firms receive when they come here.

As such, FTAs have been shown to boost exports from Singapore to countries that it concluded agreements with, says SIM University senior lecturer Walter Theseira.

"FTAs thus enhance our export competitiveness further, and should be good for our local businesses that have significant foreign trade links," he adds.

For instance, since the China-Singapore pact came into force in 2009, bilateral trade has increased by 33 per cent to reach $120 billion last year, figures from the Ministry of Trade and Industry show.

China is now Singapore's largest trading partner and the island has been China's largest foreign investor since 2013.

Singapore also became China's third-largest trading partner and largest overseas direct investment destination in ASEAN in 2014.

During Chinese President Xi Jinping's visit to Singapore last weekend, both countries launched talks to upgrade their FTA to deepen cooperation in areas such as legal and financial services.

Singapore signed its first FTA under the ASEAN Free Trade Area in 1993 and inked a free trade pact with New Zealand in 2000, its first with an individual country.

Today, it has FTAs with countries in North and South America, Europe, East and South Asia, and the Middle East.

What difference will TPP make for Singapore?
By Chong Zi Liang, The Sunday Times, 15 Nov 2015The vast majority of people think of free trade agreements from the point of view of consumers. In other words: "Will anything become cheaper?" But those holding out for prices to fall will probably be disappointed.Economists and experts Insight spoke to, like NUS economics associate professor Davin Chor, agree it is unlikely "that we will see goods becoming significantly cheaper or the new entry of brands into Singapore as a result of the TPP".This is because the country already has a very open economy, and so additional pacts do not open the floodgates for new goods and services to enter in dramatic fashion.The TPP, struck after more than five years of intense talks, will give Singapore businesses new levels of access to 800 million consumers in 12 countries that represent one-third of global trade.

Apec secretariat executive director Alan Bollard adds that because Singapore businesses have "always been quite good at going into difficult markets and finding ways to operate there", he does not see sudden and big movements of capital or reinvestments.

Still, Association of Small and Medium Enterprises president Kurt Wee sees opportunities ahead.

He says that "increasingly, there is a slant to open procurement more to SMEs" by regional governments. This trend dovetails with the TPP's aim of liberalising the tender process of state contracts.

For local businesses already leveraging Singapore's existing FTAs to enter overseas markets, a giant free trade zone created by the TPP could potentially lead to greater competition as other firms rush in to what are new markets for them.

Says Dr Deborah Elms, executive director of the Asian Trade Centre, which does research on trade activities in Asia: "In the past, Singaporean firms might have had an advantage with their FTA benefits. However, now competition in some TPP countries could come from new firms."

SIM University senior lecturer Walter Theseira also points out that fears about the TPP will most likely revolve around overseas talent coming here and vying for the same jobs as Singaporeans.

"The area Singaporeans tend to be more concerned about is competition from foreign labour, not competition from foreign imports."

But such worries are unfounded as "the TPP should not significantly curtail our ability to formulate and implement foreign labour policy as we see fit".

This is because other TPP countries have "labour market policies that are significantly more restrictive than Singapore's" and so will not agree to "effective significant liberalisation in labour".

Another advantage of the TPP is that it is "anchoring the US economically to the region", says Ms Sanchita Basu Das of the ASEAN Studies Centre at the Iseas-Yusof Ishak Institute.

"This is of high strategic value to Singapore because of fast-rising China," she says.And although Singapore already has free trade agreements with all of the TPP countries except Canada and Mexico, and other regional deals through ASEAN, they "do not have the same depth and breadth of commitments" as the TPP, says Dr Elms. This is because the TPP opens up more sectors than any of Singapore's previous FTAs, she explains.

Also, products assembled by Singapore companies from components sourced from ASEAN cannot be shipped into the US, Canada or Mexico under the current rules. But when the TPP goes into force, "parts and components can be added from across all 12 countries for shipment into the 12 markets", Dr Elms says.

Canada and Mexico will also eliminate tariffs on 99 per cent and 96 per cent of Singapore exports respectively, according to the Ministry of Trade and Industry. This includes pharmaceutical exports to Mexico, which currently incur a tariff of 10 per cent to 15 per cent.

As for the fine details, Dr Bollard says the full text - comprising a weighty 30 chapters - has just been released and analysing it will take some time.

But the TPP has been touted as a model to emulate for "next-generation" agreements.

Unlike conventional trade pacts that focused more on the movement of goods across borders, the TPP covers more complex areas such as intellectual property, state enterprises and dispute resolution.

"So in that sense it should be the gold standard but we've got to test that, we're not sure yet if that's true."

What's with the protests?By Chong Zi Liang, The Sunday Times, 15 Nov 2015In February last year, a group of people dressed as zombies took to the streets of Kuala Lumpur.But they were not fancy-dress partygoers in a parade. Instead, they were marching against the Trans-Pacific Partnership (TPP), which they believe will cause medicine prices to spiral out of control.The spectre of higher drug prices was discussed in Singapore, too, as there were fears that big pharmaceutical companies would successfully demand long 12-year patents that would give them a monopoly over next-generation medicine.In the end, the period of exclusivity was cut to five years.

But the "zombies" in Malaysia are not alone. Demonstrations in TPP signatory countries, such as New Zealand, the United States and Japan, have taken place in recent years over related issues. Negotiations have been criticised for being conducted in secrecy; the full text of the pact was released only after an agreement was reached last month.

There were also concerns about corporate rights clashing with sovereign rights.A country providing subsidised medicine to its citizens might be challenged by pharmaceutical giants that want to sell drugs at a price they want.Liberalising farming sectors proved to be a hot issue, too. In Japan, rice farmers will lose part of their longstanding protection as the country will eventually allow 78,000 tonnes of tariff-free rice to be imported, about 1 per cent of its total production.But Canada agreed to open up only a small percentage of its dairy market.Indeed, Asia-Pacific Economic Cooperation secretariat executive director Alan Bollard notes that the TPP "has taken a very cautious approach on a range of agricultural production", and it remains an "under-exploited area".

So why do countries sign agreements such as the TPP knowing there will be pressure on certain industries?

"There's clearly going to be some sectors that will be harmed by it, but the judgment of every country has been that overall it's a benefit," Dr Bollard says of the TPP.

But in Singapore's case, most of what is consumed here is imported anyway.

"Hence, in many sectors, we do not have a significant domestic industry to protect, and in any case, protecting domestic industry is often inefficient, so overall we would have more to lose than to gain," he says.

In theory, the TPP should expose Singapore businesses to more stress because of competition from foreign firms.

However, "Singaporean firms are already adept at surviving in an environment in which they receive little protection from imports from abroad", says National University of Singapore economics associate professor Davin Chor.

The challenge, then, is in "developing products and business strategies that will allow them to ride the wave of export opportunities that the TPP should create".

Similarly, Association of Small and Medium Enterprises president Kurt Wee says local businesses have to take the time to study such free trade deals so they can tap them.

Opportunities include new operations and manufacturing bases, and overseas government procurement contracts opening up for bids. "Firms should try to plan a growth roadmap in tandem with when the TPP kicks in," he adds.

Mr Wee also says he has not sensed any trepidation among Singapore businesses so far over the TPP. "From a relative perspective, when you look at the other 11 TPP partners, we are in a good position to sell more and supply more overseas."

What lies ahead for free trade?
By Chong Zi Liang, The Sunday Times, 15 Nov 2015Although the conclusion of five years of negotiations on the Trans-Pacific Partnership last month was a considerable milestone, the hard work is far from done.Each of the 12 countries in the pact will have to go through domestic ratification involving different branches of government.

This process is expected to be smooth in Singapore, where the deal must be approved by the Cabinet. Parliament must then pass legislative changes that may be required.But observers point out that elements within the United States, Japan and Malaysia will put up varying degrees of resistance.

In the US, where Congress must ratify the TPP, prominent lawmakers have already voiced their dissatisfaction with the deal. Leading candidates for the presidential election next year, such as former secretary of state Hillary Clinton, have also come out against the TPP.

On Nov 5, US President Barack Obama, who has pushed strongly for the TPP, officially signalled his intent to sign it, kick-starting a 90-day process for Congress to consider if it wants to approve the agreement.

The US, as the world's No. 1 economy, also "sets the timetable effectively" on when the TPP can come into force, says Dr Alan Bollard, executive director of the Asia-Pacific Economic Cooperation (Apec) secretariat.

This is because before the TPP can come into effect, enough economies representing at least 85 per cent of the total gross domestic product of the 12 signatories must have ratified it. Without the US, the other nations fall far short of the 85 per cent target.

Similarly, Asia Trade Centre executive director Deborah Elms says "the battle in the US will be tough" .

"Members of Congress do not see many benefits from voting on trade agreements and an election year in 2016 makes taking a tough vote even harder," she adds.

How soon the TPP can be implemented will also affect how fast other countries can join it. South Korea has expressed keen interest, while Indonesia and the Philippines have signalled they are open to such a move.

One glaring omission from the world's biggest trade deal is the world's second-largest economy, China. The reasons behind its exclusion are still uncertain, though it has been suggested that China will have difficulty meeting TPP standards on areas like government procurement. It is also unclear how Beijing views its exclusion. Its Ministry of Commerce said it took an "open-minded attitude" towards the TPP but made no overtures to be a part of it.

Meanwhile, those already in the partnership will have to start taking steps towards complying with the requirements stipulated in the TPP.

Most experts believe Singapore will have only minor adjustments to make compared with a country like Vietnam, which will have to work on its labour standards and relook its state enterprises.

But other free trade initiatives besides the TPP are also afoot. A draft report on the Free Trade Area of the Asia-Pacific will be presented at the coming Apec summit, and the full report will be ready at next year's meetings in Peru.

The study aims to examine the 150 or so trade agreements in the Asia-Pacific region and determine how compatible they are.

"We're pulling all those together to check just whether they are heading in the same direction or whether they conflict. Could there be some problems between them sort of hitting against one another?" says Dr Bollard.

Making sense of some acronyms
The Sunday Times, 15 Nov 2015Apec: Asia-Pacific Economic CooperationA consensus-based organisation formed in 1989 that deals with economic issues and promotes free trade. Its 21 countries account for 47 per cent of global trade. The Apec Economic Leaders' Summit takes place later this week in Manila.FTA: Free Trade AgreementA legally binding document committing two or more countries to reducing or eliminating trade barriers. Aims to ease the flow of goods and services.FTAAP: Free Trade Area of the Asia-PacificYet to be concluded. Discussions began in 2006.It will build on existing frameworks, but involves the myriad of regional and bilateral pacts.

RCEP: Regional Comprehensive Economic PartnershipAn FTA between ASEAN members and Australia, China, India, Japan, South Korea and New Zealand. Viewed by Singapore as a path to regional integration, which will give home- grown businesses access to a huge market. Negotiations were expected to finish by year-end but will take more time.

TPP: Trans-Pacific PartnershipA sweeping deal struck by 12 economies on the Pacific Rim that make up 40 per cent of the world economy. Next up is a ratification process that will see it vetted by each country. The 12 signatories are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam.

10 benefits the Trans-Pacific Partnership will bring SingaporeFull text of 12-nation trade agreement reveals its direct and indirect impact on the economy
By Chia Yan Min, The Straits Times, 16 Nov 2015After much criticism over the transparency of the biggest free trade agreement struck to date, several governments involved in the trade talks released the full text of the Trans-Pacific Partnership (TPP) two weeks ago.The document, spanning 30 chapters and running into more than a thousand pages, is the actual text agreed on by the 12 countries which signed the agreement.It goes into the fine print of the agreement that will cover 40 per cent of the world economy.The pact must now be signed formally by the leaders of the nations - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam - and ratified by their legislatures.The Straits Times picks out 10 key takeaways from the trade deal for Singapore.MARGINAL SHORT-TERM IMPACTSingapore already has 21 free trade agreements and economic partnership agreements in force, so additional benefits from the TPP may be incremental.Still, the TPP countries represent a large market for Singapore, accounting for 30 per cent of its total trade in goods in 2013 and 30 per cent of foreign direct investment here.Exporters will benefit from the removal of duties on more types of goods than previous trade agreements provided for.For instance, a Singapore ice cream manufacturer could find it easier to qualify for lower tariff rates when exporting to the US under the TPP. This is because milk from New Zealand, sugar from Australia and cocoa from Mexico used in the production of the ice cream will count as input from TPP countries, and can combine to help qualify the end product for preferential tariffs.INDIRECT BENEFITSWhile the direct benefits might be few, Singapore could be an indirect beneficiary of increased trade between other TPP nations, said Mr Shivaji Das, a senior vice-president at consulting firm Frost & Sullivan.For instance, the TPP will phase out the 2.5 per cent US duty on imported cars over 25 years and scrap the levy on many auto parts.This is expected to boost Japan's automobile exports to the US, he noted.Singapore companies which provide services such as shipping and trade financing "could benefit from increased trade between the big players".A BOOST FOR ASEANDeveloping regional economies, such as Malaysia and Vietnam, will benefit strongly from the trade deal, and there will be payoffs for Singapore from the growth in activity, said Mr Nicholas Lingard, arbitration partner at law firm Freshfields Bruckhaus Deringer.Vietnam could see a 10 per cent boost to its economy by 2025, while Malaysia could experience a 5.5 per cent expansion in the same period, based on a Peterson Institute for International Economics study."We expect to see higher deal flow in South-east Asia as a result," said Mr Lingard.OPENING UP NEW MARKETSSingapore already has existing free trade agreements with all the 12 countries involved, except Canada and Mexico.Mr Das noted that Mexico is an emerging manufacturing powerhouse still heavily dependent on the US market."Mexico will be looking at Asia as a key market," he noted.Under the TPP, Canada and Mexico will eliminate tariffs on almost all of Singapore's exports. This includes shipments of pharmaceutical products to Mexico, where current tariffs range from 10 to 15 per cent.REMOVAL OF FOREIGN EQUITY RESTRICTIONSThe TPP will lift curbs on foreign ownership of companies in private healthcare, telecommunications, courier, energy and environmental services in Brunei, Malaysia and Vietnam.While this will benefit Singapore investors keen on those markets, these industries tend to be dominated by domestic incumbents. It remains to be seen how much headway foreign firms will be able to make.PROVISIONS FOR CROSS-BORDERTRADE IN SERVICES Trade deals have, traditionally, focused on easing the flow of goods between countries, but the TPP is one of the few with comprehensive provisions for the services trade, said Mr Das.The pact will open up markets in TPP countries for Singapore firms offering services such as consultancy and urban planning, he added.However, restrictions remain. Some TPP countries have been allowed to maintain existing protectionist measures in sectors such as transportation services, where firms still have local content requirements.GOVERNMENT PROCUREMENT OPENED UPThe TPP will enable Singapore companies in the IT, construction and consultancy sectors to bid for government procurement projects in markets such as Malaysia, Mexico and Vietnam, which were previously closed to foreign bidders.REDUCING NON-TARIFF BARRIERSThe TPP will reduce "behind-the-border", or non-tariff, regulatory barriers to ease the flow of trade and investment. This means countries will be required to make Customs laws, regulations and procedures more transparent, and also tackle hidden costs impeding business operations, such as corruption.A '21ST CENTURY' AGREEMENTThe TPP addresses emerging concerns faced by businesses and consumers, such as intellectual property and the growth of the digital economy.It sets in place rules on e-commerce to ensure that government regulations do not impede cross-border data flows, or impose requirements that force businesses to place data servers in individual markets as a condition for serving consumers in that market.The agreement also prohibits the imposition of import duties on electronically transmitted products, hence protecting Singapore businesses and consumers from this potential extra cost.TPP governments have agreed to put in place laws protecting consumers from fraudulent and deceptive commercial activities online.The deal also commits countries to implement common standards across major types of intellectual property, including patents, copyrights and trademarks.This will make it easier for Singapore businesses to search, register and protect their trademarks and patents in new markets.ACCESSIBILITY TO SMEsWith its special provisions for small and medium-sized enterprises (SMEs), the trade deal aims to make it easier for these companies to participate in regional production and supply chains.

The TPP countries will set up websites with information targeted specifically at SMEs. They will also develop capacity building programmes for SMEs, to help firms take advantage of the provisions in the deal.SMEs make up 99 per cent of companies in Singapore and employ 70 per cent of the workforce.